FEDERAL OPEN MARKET COMMITTEE ACTIONS AND CHANGES IN DISCOUNT RATE.The Federal Open Market Committee at its meeting on March 20, 2001, decided to lower its target for the federal funds rate Federal Funds Rate The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.Notes: This is what news reports are referring to when they talk about the Fed changing interest rates. In fact, the FOMC sets a target for this rate, but not the actual rate itself (because it is determined by the open market). by 50 basis points to 5 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate Discount Rate 1. The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank.2. The interest rate used in determining the present value of future cash flows. Notes: 1. This type of borrowing from the Fed is fairly limited. Institutions will often seek other means of meeting short-term liquidity needs. to 4 1/2 percent. Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well under way. Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft. In these circumstances, when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely. The Committee continues to believe that against the background of its long-mn goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. In taking the discount rate action, the Federal Reserve Board approved requests submitted by the Boards of Directors of all twelve Reserve Banks. |
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